The COVID-19 pandemic has accelerated many technologies in the workplace as most office employees have been pushed to work from home. From cybersecurity solutions to remote meeting software, many of these trends have already been part of a larger, emerging trend called Industry 4.0, which revolves around the idea of merging our physical world with the digital world.
In this Q&A, Hans Albrecht, VP and portfolio manager at Horizons ETFs, discusses important emerging trends in technology and how investors can get exposure to these trends through ETFs.
There’s growing interest in technology ETFs driven by the work-from-home (“WFH”) shift. What types of stocks could benefit from this trend?
Key WFH and quarantine sectors include healthcare, ecommerce, pantry plays, home entertainment, Industry 4.0 plays that use big data to build and power new solutions, such as cloud usage, and of course, technologies that enable work from home (WFH). But I believe that the COVID-19 pandemic has only accelerated digital transformation trends that were already well underway before COVID-19. In other words, the WFH stocks were already on an upward long term trajectory that the WFH movement has accelerated.
As WFH policies have been forced upon millions of businesses, I think many businesses approve of the trend, a savings of commute times and cost, good productivity and, arguably, a better work-life balance. Better work-life balance means happy employees, and that’s a good thing. In the long term, companies can save on real estate costs and even wages. As a result, companies like Facebook, Shopify and even BMO have expressed an intent to transition to WFH for a large part or all of their workforces.
The COVID-19 “fixes” may prove to be the beginning of a trend for many companies, so the trend (could be) here to stay.
Our three technology ETFs have been among our best-performing over the last year — what factors have helped drive this success?
I’ve long referred to these themes as “trends with staying power,” and I believe the current pandemic only serves to entrench that concept. If you set aside stock performance and look at broader equity profitability, a broad U.S. equity index like the S&P500 has been struggling over the past year.
One bright spot in the U.S .stock market has been technology, such as cloud businesses, ecommerce, data centre expansion, online software and platforms. These have been growth areas, and in the absence of growth and profitability in other areas, investors have been looking for growth anywhere they can find it.
Robotics and automation have emerged as heroes of the pandemic as they help with health and logistics efforts in, for example, drug and supply delivery, and hospital disinfecting. Artificial intelligence can derive health insight and accelerate drug discovery. 3D printing is making a big comeback as supply chain disruptions show businesses the value of self-sufficiency in manufacturing. Internet of Things trend (creating smart and internet-enabled devices and sensors) has become important for patient monitoring and interactive medicine. And, cyberattacks are soaring as companies implement work-from-home processes, putting a spotlight on the need to protect our expanding digital world.
Can you discuss the three ETFs, what are the major differences between FOUR, RBOT and HBGD?
The Horizons Industry 4.0 ETF (FOUR) invests in five categories, 10 equities in each, in an equal weighted mandate. In all, it owns 50 names across the categories of big data and cloud, robotics/automation and artificial intelligence, augmented reality and 3D printing, cybersecurity and finally, Internet of Things. This mandate enables investors to gain exposure to a cross-section of cutting-edge companies that reach into all corners of Industry 4.0. These are not startups – the average market capitalization in FOUR is about $60 billion – these are small and big firms that are current proven leaders in their respective categories.
The other two ETFs each break out one of the five themes from FOUR, and focus more on their respective categories.
The Horizons Robotics and Automation Index ETF (RBOT) goes deeper into the robotics, automation and artificial intelligence category. It currently holds 36 names, versus 10 in the same category in FOUR. So the selection starts to get more granular across a theme that encompasses the full range: robotics, smart automation, drones, autonomous vehicles, and the intelligence behind it all – software and algorithmic elements that bring it all together. Semiconductors are well represented as they make up much of the Lego bricks involved in making amazing things happen.
Importantly, because North American indices are lacking in some of these areas, exposure is about 50% in international (non-North American) names. Japan and Switzerland excel in the category as some of the best names in sensors and robotics are domiciled there. This may prove to be an added bonus to unitholders as it diversifies portfolio exposure a little more out of the usual Canadian and U.S. names.
The Horizons Big Data & Hardware Index ETF (HBGD) delves deep into one of the other important themes in FOUR: big data and hardware. This category is of particular interest to me as it highlights a critical foundational layer to what makes Industry 4.0 tick. We are creating data at an exponential rate via smartphone usage and greater internet connectivity at work and in the home. But what we do with that data is what counts – and with today’s technology we can do a lot. We need to organize and make good use of it. Big data is now becoming a part of company strategy as it drives insight into what customers need now and potentially in the future.
In addition, cloud computing has gained prominence as many companies transition to cloud-hosted operations, desktops and applications, accelerated by COVID-19. Investing in this category is about the organization of data and the nuts and bolts of what makes the ever-expanding cloud possible: data centres and digital REITs, semiconductor manufacturers, and platforms that help to organize data and derive insight from it all.
What’s the benefit of owning an ETF rather than simply buying some of the sector leaders as individual stocks?
Well, competition in the technology space is very strong.
On the one hand, a few of the behemoths have significant power that will be difficult to overcome. We own Google, and they have an almost unassailable grip on data — along with Facebook to some extent — and have their fingers in virtually every corner of technology.
Unbeknownst to many, they are also quiet leaders in augmented reality and autonomous vehicles on top of their search business.
A company like Nvidia can focus on gaming but then shift to cryptocurrency rigs, and then shift to AI or self-drive vehicles. Firms in these ETFs need to have eyes all around their heads to make sure they understand both where they’re going and who’s nipping at their heels, or indeed, who is coming up with a better mousetrap. For these reasons we feel that the best way to gain exposure to the themes is in a diversified way. Unless you have your finger on the right pulse at the right time you may be better served owning a proper cross section of leading names.
We don’t believe investors should only have exposure to one or two names in the space, at the risk of owning the next Palm Pilot or Blackberry at the wrong moment. Competition can pivot more easily because of skill overlap and the IT-driven nature of the business. The technology space is merciless and moves rapidly. New York taxi medallions traded at an all-time high in 2015; three years later, Uber was well into decimating the industry.
Disruption can happen quickly and potentially without warning – investors can diversify their risk and their exposure to these incredible themes. We see a properly formulated and diversified basket within the theme as the way to go.
FOUR: The Horizons Industry 4.0 ETF (FOUR) seeks to replicate, to the extent possible, the performance of the Solactive Industry 4.0 Index, net of expenses. The Solactive Industry 4.0 Index is designed to provide exposure to the performance of equity securities of companies that are involved in the transformation of manufacturing and the industrial market through the development or implementation of new technologies and innovations. Horizons FOUR seeks to hedge the U.S. dollar value of its portfolio to the Canadian dollar at all times.
RBOT: The Horizons Robotics and Automation Index ETF (RBOT) seeks to replicate the performance of the Indxx Global Robotics & Artificial Intelligence Thematic Index (the “Index”). The Index is designed to provide exposure to the performance of equity securities of companies that are involved in the development of robotics and/or artificial intelligence (“A.I.”). Horizons RBOT seeks to hedge the U.S. dollar value of its portfolio to the Canadian dollar at all times.
HBGD: The Horizons Big Data & Hardware Index ETF (HBGD) seeks to replicate, to the extent possible, the performance of the Solactive Big Data & Hardware Index (“the Index”), net of expenses. The Index tracks a portfolio of global companies focused on data development, storage and data management-related services and solutions, as well as hardware and hardware-related services used in data-intensive applications such as blockchain.
Source: Bloomberg as at June 30, 2020.
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